The impact of roads and agricultural extension on consumption growth and poverty in fifteen Ethiopian villages

This paper investigates whether public investments that led to improvements in road quality and increased access to agricultural extension services led to faster consumption growth and lower rates of poverty in rural Ethiopia. Using a Generalized Methods of Moments – Instrumental Variables – Household Fixed Effects estimator, we find evidence of positive impacts with meaningful magnitudes. Access to all-weather roads increases consumption growth by 16 per cent and, reduces the incidence of poverty by 6.7 per cent. Receiving at least one visit from an extension agent raises consumption growth by 7 per cent and reduces poverty incidence by nearly 10 per cent. These results are robust to changes in model specification and estimation methods. Acknowledgements: We thank the following organizations for funding the survey work on which this paper is based: SIDA, USAID and the World Food Programme. Analysis was supported by funding received from USAID under BASIS grant LAG-4213-A-00-6016-00 and from IFPRI’s Ethiopian Strategy Support Program (ESSP). We have benefited from superb research assistance from Yisehac Yohannes and comments from seminar participants at Addis Ababa University, the Ethiopian Development Research Institute, the 2006 ESSP Policy Conference and IFPRI. Errors are ours. Addresses for correspondence: Dercon, Department of Economics, University of Oxford. Email: [email protected] Gilligan and Hoddinott, International Food Policy Research Institute, Washington DC. Email: [email protected]; [email protected] Woldehanna, Department of Economics, Addis Ababa University. Email: [email protected]. In many African countries, improving growth rates in agriculture is seen as critical for sustained poverty reduction. Such a view stems from the fact that while Africa is urbanizing, the vast majority of people still live in rural areas and derive livelihoods from agricultural activities. Nowhere is this truer than in Ethiopia where agriculture accounts for 85 per cent of employment nationally and 96 per cent of employment in rural areas (World Bank 2005). Public investments can play several roles in creating the enabling environment necessary to stimulate agricultural growth. One of these is through the provision of infrastructure, most notably improved roads. Better roads lower transactions costs associated with agricultural activities and in so doing have the potential to reduce the costs of acquiring inputs, increase output prices, reduce the impact of shocks and permit entry into new, more profitable activities. A second is through facilitating technology transfer. For example, by providing agricultural extension services, governments can make farmers aware of new agricultural technologies, advise them on best farming practice and assist farmers in dealing with adverse shocks such as insect infestations or plant diseases. While governments frequently are involved in other dimensions of agricultural activities, there is an a priori strong case for governments undertaking these investments given the public goods nature of roads and technology transfer. However, uncovering evidence of impact of investments such as these is not straightforward. One approach has been to use country-level or regional level data and relate this to changes in agricultural productivity. Antle’s (1983) early, and still widely cited study is an example of this approach as is the work by Fan, Hazell and Thorat (2000) and Fan, Zhang and Zhang (2002). A strength of approaches such as these is that